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Crackdown by the Commerce Commission on non-notified acquisitions

Contacts

The High Court has imposed a pecuniary penalty of $3.4 million on First Gas Limited (First Gas) after it admitted to engaging in anti-competitive conduct when acquiring the Bay of Plenty gas distribution assets of GasNet Limited (GasNet). A copy of the judgment can be found here.

Background

First Gas owns and services the transmission and distribution market for natural gas across more than 40 North Island towns and cities. First Gas is a comparatively new entrant to the gas transmission and distribution market, having acquired Vector Gas Limited’s transmission network on 20 April 2016 and Maui Development Limited’s transmission network on 15 June 2016.

GasNet is controlled by the Whanganui District Council and operates the natural gas distribution network in Whanganui. In 2016, GasNet expanded its services into the Bay of Plenty by securing the rights to develop a distribution network into Papamoa.

In the second half of 2016, First Gas made two offers to acquire GasNet’s Bay of Plenty gas distribution assets, which were rejected by GasNet. After increasing pressure and threats of escalating competition were made, a third offer was accepted by GasNet in December 2016. The Agreement contained a restraint of trade under which GasNet agreed to cease offering gas distribution services in the Bay of Plenty region for five years. The Court later described the transaction as “a concerted effort on a reluctant seller to remove a competitor”.

The Commerce Commission (the Commission) were informed of the acquisition, but neither First Gas nor GasNet sought a clearance. The Commission investigated and decided that the acquisition was in breach of both sections 27 and 47 of the Commerce Act in that:

The agreed restraint of trade removed any existing and future competition between First Gas and GasNet; and

First Gas’ purchase of GasNet’s assets eliminated the existing competition between First Gas and GasNet and, irrespective of the restraint of trade, reduced the potential for future competition.

High Court decision

First Gas admitted liability for breach of sections 27 and 47 of the Commerce Act. It also agreed with the Commission on a recommended penalty of $3.4 million based on:

A starting point of $4.6 million to $4.9 million comprising of $3.5 million to $3.8 million for the breach of s47 and an additional $1.1 million for the s27 breach.

A discount of 25 percent to reflect First Gas’ admission of liability and cooperation with the Commission’s investigation.

In agreeing with the recommended penalty of $3.4 million, Justice Mallon noted this was “a serious breach by a large and well-resourced defendant” and the effect on the gas market was “on-going and is potentially permanent”. However, as it was an unintentional breach, Mallon J held the breach was not “a breach at the most serious end”.

Mallon J also noted that the penalty, in addition to the purchase price paid by First Gas, “means that the assets will not be profitable over their life time” and that “First Gas will incur a material loss from the acquisition”.

The High Court also made agreed orders that First Gas would not enforce its restraint of trade against GasNet.

What this means

The case highlights that the Commission is actively monitoring non-notified acquisitions that it considers raise competition law issues. For example, the Commission has filed proceedings against Wilson Parking for its non-notified acquisition of a Capital car park in central Wellington. The Commission has also recently opened an investigation into Bondor New Zealand’s non-notified acquisition of the insulated panel assets of the Long Group.

Care should be taken to ensure that any proposed acquisitions will not be in breach of the Commerce Act. If there are risks raised from that review, then consideration should be given to seeking clearance from the Commission prior to closing.

Who to ask?

Our specialists are happy to assist with any questions regarding proposed purchases and whether they may require a clearance application.